When announcing the Credit Guarantee scheme in April 2012 The Minister for Jobs Enterprise & Innovation said ‘ the scheme aims to provide much-needed credit to job-creating SMEs who currently struggle to get finance from the banks’. As anyone involved in business and especially the SME sector knows the lack of finance and the tightening of bank working capital in the last number of years has had a detrimental impact on our economy and the credit squeeze continues to worsen.
The number of viable businesses since 2008 that could have survived if they had been given the opportunity to work through their financial difficulties is a testament of how the implosion in the banking sector and the almost complete shutdown of the financial system has only assisted in pushing businesses and our economy over the edge rather than support them as we had been led to believe when the various banks were bailed out by the Irish state.
A recent report by the Irish Central bank has confirmed what most of us already knew about the levels of lending in the banking sector. The report states that Ireland has the second lowest approval level for small business loan applications in the euro zone (only Greece are worse) and that Irish loan applicants are twice as likely to have a loan application refused than anywhere else in Europe.
The government to their credit have finally reacted to the credit crunch and hopefully this new scheme will assist the SME sector to recover and expand.
If you wish to read the full Credit Guarantee Scheme Act please click here
The aim of the scheme is to provide € 150m in funding per annum over 3 years for startups and the SME sector. The scheme will provide loan guarantees to SMEs applying for finance with financial institutions. The minister has yet to announce the finer details of how the scheme will operate and what financial institutions will be involved.
Some of the key details of the scheme are as follows:
The definition will be in line with the criteria set out by the European Commission. A business must have less than 250 employees, no greater than € 50m in annual income or an annual balance sheet value of less than € 43m,
Guarantee Value and the costs
The scheme will guarantee 75% of the value of the loan, which will provide a level of insurance for the banks when making a lending decision. There will be a 2% annual premium on the outstanding balance that must be paid to the minister each year until the loan has been repaid. This will obviously be an extra charge to the borrower on top of the cost of funds charged by the bank. This premium can be paid on an annual or on an instalment basis.
The aim of the scheme is to create employment and stimulate the economy by making additional credit available to ‘commercially viable’ businesses that are struggling to source finance in the current climate. It is important to note that the lending criteria will be as exhaustive and ruthless as the existing criteria being used by banks but there will be an incentive to lend to viable businesses as some of the risk is being borne by the government.
It is important to note that there is no guarantee that an applicant will be successful in their application as the normal lending terms and conditions will apply.
As with any banking application it is essential that a full critical risk analysis is completed of the business well in advance of making the application. Again the business must take into account the additional annual charge of 2% by the government when completing its projections.
When preparing the business plan it is essential to work out for the bank and the government how this loan will be repaid. For startups that intend to apply for the scheme their business plan must be as detailed and well prepared as regards the non financials aspects of the business (marketing, product analysis, competitors, growth strategy,management team etc) as well as the important financial projections.
Capita Asset Services are the administrators of the scheme. They are currently in discussions with the various banks to work out the manner in which the scheme will be operated. It is expected that the scheme will be in place by the end of September 2012 but this start date still has yet to be confirmed. If you are considering making an application under the scheme our advice would be to start the planning for this immediately to ensure that you are ready to hit the ground running when the official scheme starts.
Borrowers will be required to maintain records, books of accounts and such other documentation as specified under the scheme and these books, records and accounts must be made available if requested.
There will be a risk involved in the scheme of borrowers defaulting but the structure and administration of the scheme should hopefully mitigate this risk.
As we are all very much aware banks have returned to cashflow lending practices rather than property based security which makes it more important to consider and show the bank how you intend to repay their loan. The security on these loans are now being provided by Ireland Inc (up to 75%) which will give a level of comfort for the relevant bank.
Once it is up and running this scheme will hopefully protect existing jobs, enable businesses to expand thus creating new employment and in turn contribute additional revenue and reduce the Social Welfare cost to the exchequer.
For every €150m of additional lending, the scheme is expected to benefit over 1,800 businesses. The cost of the scheme per €150m of lending is €6.38m. When these benefits are taken into account, the net gain to the Exchequer is over €25m per €150m of lending.
It is estimated that SME’s make up 98% of businesses in the Irish Economy (as reported by the CSO). This amounts to circa 200,000 businesses in Ireland employing almost 1.3 million people. Given the importance of the SME sector it is obvious that the majority will need access to some form of working capital out of the total projected fund available of € 450m over the next 3 years.
Lets hope that this scheme is successful as we need the SME sector to be successful and expand if we are to have any hope of getting growth in our economy.
Mark is a Director at Quintas
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